Losses on bailed out banks and lies about public debts.

FT Headline this morning:

Warning on £66bn public bank stakes

Taxpayers may never see the return of the £66bn spent on shares in Royal Bank of Scotland and Lloyds Banking Group…

The article is quoting from the Public Accounts Committee report on the sale of Northern Rock. A sale in which, by the way, we, the tax payers lost £500 000 000. But what’s half a billion eh? Just a few schools, a few hospital beds , a few university research grants. Nothing important. The report concludes it is likely that the tax payer will lose more on Northern Rock up to £2 billion in total. More losses: More enforced austerity form the Austerity Enforcement Party.

What worries the report’s authors more than Northern Rock, however, is that they do not think, if the sale of Northern Rock was anything to go by, that there will be any great market enthusiasm for buying from the government the taxpayers’ controlling stake in RBS and large share of Lloyds. As the report stays with commendable understatement,

The lack of competition does not fill us with confidence that the taxpayer will make a profit on the sale of the two banks which remain in public ownership, RBS and Lloyds. There is a risk that the £66 billion invested in RBS and Lloyds may never be recovered.

If only the £66 billion loss were the end of it. But it won’t be.  Both RBS and Lloyds are still sitting on yet more undeclared losses. Back in the spring of this year, 2012, PIRC the shareholder advisory group, wrote a report arguing that many, if not all, the major British banks were using accountancy rules (mainly Mark to Model) to overstate their profits and understate their losses. In June the Telegraph reported,

UK banks sitting on £40bn of undeclared losses

Royal Bank of Scotland (RBS) was in the worst condition, PIRC found, with £18bn of undeclared losses that would wipe out more than a third of its capital buffer and potentially force the 82pc state-owned lender back to the taxpayer for another rescue.

HSBC had ($16bn) £10bn in undeclared losses, Barclays £6.7bn, Standard Chartered $3.6bn (£2.3bn) and Lloyds Banking Group £2.9bn. PIRC presented its numbers to all the banks and said none disputed them. (my emphasis)

These losses haven’t been recognized but are there. They are real. They are simply being papered over by officially sanctioned acounting rules. But should the tax payer ever try to sell its stake in these moribund money-pits the losses would surface. No bank would be fooled by the pretence for the simple reason that they are using the same trick themselves.  What the government really needs is an idiot. Someone stupid enough to buy a rotten bank. Now who could they possibly find?

Spain has the answer. Spain had exactly this problem with its own Frankenbank, Bankia. Bankia was sewn together from the decaying parts of Spains deceased Caja system. Once Bankia was created, the government was desperate to privatize it.

To that end the newly appointed head of Bankia, Mr Rato, stood up and said, that Bankia was, I quote from the official Press release,

 solid, healthy and with a vast capacity for generating resources, a factor that has already proven its values on the market.

The Bank even posted a €44 million profit. Bankia, through its network of Caja branches then aggresively sold its shares to its own customers. 120 000 of them bought the lies. You can read more about Mr Rato, Bankia and the rot in Spain in The Eurofiscal Corruption Contest – The Spanish Entry.

Since then, Bankia has posted a €7.05 billion loss for the first nine months of this year. As for the poor people who bought Mr Rato’s lies, well the shares they bought have lost 70% of their value since listing in 2011.

So there is the answer for the UK government. My guess is the government will either try to sell shares in RBS and Lloyds directly to the public, or in the case of RBS buy the rest of the bank first, nationalizing it, and then sell. Nationalizing it first would allow the government to split off the worst parts of RBS’s debts, leaving them on the public’s purse forever, and then privatize the ‘new, clean’ RBS. This way the  public would buy the bank twice (that is what privatizing is – you buy shares in something you already own) AND leave the tax payers to pay off all the bank’s worst losses as well. Of course it won’t sound like that when they come to advertize it. Much like Mr Rato’s Bankia didn’t sound bad.

Of course I am presuming a ‘new’ Bankia style RBS wouldn’t make money. What are my grounds for that? Several actually. First, if anyone thought RBS was going to make money the Public Finance committee might have said so. Second, if anyone thought RBS was going to make money they would be buying its shares right now. The shares are low. They might not look it but they are.

It really looks like the shares jumped up in June doesn’t it? They didn’t. What happened is a share consolidation. The bank  exchanged 10 old shares for 1 new one. Each share was then worth ten times more, but everyone had a tenth as many shares.

The bottom line is, that for the government to make ANY money on the shares it bought for us, the share price will have to rise to  OVER 500 pence a share.  Fat chance. They are about 280/share at the moment.

But maybe they’ll go up?  After all aren’t the banks healed and the recession over? For the banks I refer you back to the report on the banks’ £40 Billion in still undeclared losses. For the economy I refer you to the reports that the whole Euro zone (including us) is now officially back in recession. And one more thing, let’s talke a quick look at UK debt. The reality is NOT as the government would have you believe.

First from a McKinsey Report from January 2012 called Debt and Deleveraging.

The composition of UK debt—how much is owed by different sectors of the economy—diverges from that of other countries. While the largest component of US debt is household borrowing and the largest share of Japanese debt is government debt, the financial sector accounts for the largest share of debt in the United Kingdom. (My emphasis)

UK debts are NOT, simply, officially, utterly undeniably, NOT due to rampant and out of control public sector spending and borrowing. The report goes on,

Although UK banks have significantly improved their capital ratios, nonbank financial companies have increased debt issuance since the crisis. British financial institutions also have significant exposure to troubled eurozone borrowers, mainly in the private sector.

I talked about how the banks have improved their capital ratios in recent posts. Needless to say it is more smoke and mirrors than anything else. It is, however, the ‘non-bank financial companies’ which is the red flag. These are the asset managers, Hedge funds, Pension funds and financial insurers of every sort who have been – ‘helping’ the banks with their bad assets and regulatory capital. And much of the money they have spent taking on new debts is money they or their customers borrowed from…the banks. So what do you think, is the  UK financial sector in robust good health and on a prudent and firm foundation?

To return to bank versus public debt for a moment. This is such a vexed issue, not least because our government, in fact all Europe’s governments, have seized this moment to insist that it is public spending which is the problem and cuts to public spending are therefore the only answer. The McKinsey report flies in the face of the goverment’s argument. And the McKinsey report is not alone. In November 2010 the well known left-wing, hot-bed of revolutionary agitation that is known as PricewaterhouseCoopers (PwC) released its usual report on the UK’s economic outlook. This is what PwC found.

  •  Total UK debt was around 540% of GDP at the end of 2009, up from around 200% of GDP in 1987.
Sounds bad. Isn’t this what the government has been saying? Well, no. The report explains,
  • This large and persistent rise in total UK debt has been driven by property-related borrowing by both households and non-financial companies and (most dramatically since 2000) by sharply rising lending between financial institutions.
Surely property borrowing means us, you and me? Yes it does, if you say ‘borrowing’. But borrowing is also lending. So what the report says is exactly what McKinsey said — the bulk of UK debts is ‘lending’ from the banks. We borrowed it but the loans were made by, OFFERED by,  and remain at the banks. Sure we have a role. We have to pay. But if we can’t, then bye bye banks. No matter how you spin it the debts were created by and are at the banks.  Back to the report.
  • By comparison, UK government debt was relatively low and stable as a share of GDP from 1987 to 2007 and, despite rising sharply due to the recession, was still less than a sixth of total private sector debt in 2009. (My emphasis)
Another problem for the official line. Where is the mention of the out of control public spending and greedy nurses?!!! Aparently it was all less than a sixth of private debts. The long and the short of the PwC report is that the huge rise in UK debt has been due to increases in debts owed by,

… households, private companies and financial institutions rather than increasing public debt, which only started to rise materially during the recent recession.  (My emphasis)

In short, David Cameron and George Osbourne are politcally motivated liars or stupid or both. And here is a graph to prove it.

 

 

 

 

 

 

 

 

 

Where in this graph is the run-away public spending and indebtedness? Where do we see the  country being run into the ground by public borrowing? Where is the evidence to say our debt level is all due to  an orgy of people taking on debts they couldn’t afford? The lines for BOTH government and household debts show a modest increase in debt. It is in Financial Companies that nearly ALL the increase occurs. FACT.

Remember this graph was produced by one of the auditors of the banks. One of their own in other words.

This has nothing to do with party politics nor petty BS ideology either. It is data. The fact that it blows out of the water the ‘austerity is necessary to reign in out of control public spending’ is not party political nor ideological either. It is just ‘fact’, that happens to be inconventient for those who peddle the lies.

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16 Responses to Losses on bailed out banks and lies about public debts.

  1. simoncz November 16, 2012 at 2:03 pm #

    Well said. We’re being conned. Somebody is determined not to let this crisis go to waste.

    • Anne Tanner November 17, 2012 at 7:10 pm #

      “Somebody is determined not to let this crisis go to waste”

      Yes, and this is where the politics come in The banks and the corporations need to reverse the improvements made in our living standards. They think that they no longer need the real economy to create wealth so why invest in industry, jobs, welfare, NHS…?

      To do their bidding and continue to bail these scammers out, the government has to make a case for cuts in all these things.

      Although tbh I don’t think Dave and co are the sharpest tools in the box! They probably believe that public spending is the problem its suits their political agenda to do so.

  2. Nell November 16, 2012 at 2:12 pm #

    Nice peice. If you want up to date breakdowns on private sector debt ratios (based on ONS data) Neil Wilson post figures when the ONS releases data. You can find them on his blog. http://www.3spoken.co.uk. He also does breakdowns on employment.
    Neil Wilson has done work with Steve Keen and the data he compiles uses the same methods as Steve Keen did in his Debt Britannia blog peice.

    • Golem XIV November 16, 2012 at 2:22 pm #

      Ah, now that’s useful. Thank you.

    • John G November 17, 2012 at 4:15 am #

      Indeed. Steve Keen has been consistently highlighting this line for years now. Debunking Economics is essential reading, if a little hard going.

  3. Neil Wilson November 16, 2012 at 3:08 pm #

    It’s important not to get excited about numbers by putting them through a ‘standard business’ filter.

    Government is not a standard business.

    It gets its ‘income’ from *every* transaction induced in the economy and it effectively has an unlimited overdraft at the Bank of England (which it owns). No business has that, and the interpretation of the accounts has to take that into consideration.

    When a bank fails it is the job of the central bank to ‘take a loss’ on that bank. It’s fairly obvious why really. If the government injects money into the economy to buy a failed bank and then takes more out of the system to sell it back, then that acts exactly like raising taxes.

    Which is not a smart move in a recession.

    It is perfectly ok for the government to ‘make a loss’ on Lloyds and RBS, because it will always get the money back by virtue of its ability to get income from every transaction in the economy. The job of the government is not to balance books. It is to maintain money circulation such that we maintain full employment and price stability.

    Personally I would nationalise them properly, write off the loan book completely, shut down the investment bank arms, recapitalise them via QE style injection from the Bank of England and set them to work competing with the remaining private banks on the lending rates and current accounts.

    If that then causes the rest of the private banks to fail, then they needed to die anyway.

    • Golem XIV November 16, 2012 at 3:27 pm #

      Hello Neil,

      I just sent you an email. Hadn’t put two and two together to recognize who you are. SORRY. Egg on face time.

      I agree with you when I am talking from an MMT point of view. But it gets confusing – for me at least – when I feel I am taking on the idiocy of our government and doing so, at least in part, from within their set off assumptions.

      I know it needn’t be a problem for the government to make a loss – if we were not dealing with a government who thinks it is a problem. So I find myself sometimes trying to show that even within their assumptions they are wrong and stupid.

      But even from a more MMT point of view I think it does make a difference that the government takes on private debts, pays them off and allocates billions for bailing them and buying them. It makes a difference – I think – because even with in MMT the rate at which money can be pumped in does matter. If you pump in billions one day for X you are a little restrained from pumping in another lot of billions for Y.

      We can’t simply say – it’ll be fine because there is unused capacity. The new money has to make the unused capacity productive. All that money must create economic output or it will cause inflation.

      So I object to puttingall our money – even if it is just printed up – all in to saving rotten banks. I do not want to see the nationalized IF it is done by buying them from their private owners at anything other than fire-sale prices. Let them go bust then buy them for nothing. Let the invstors and bond holders take the losses they invested in. Their loss not ours. I just do not want to see dead beat banks being sold to gullible people the way they were sold Bankia.

      I agree 100% we should have and still could capitalize new or clean banks and would celebrate if they killed the other private debt ladened Frankenbanks.

      So after all that – what I mean to say is, ‘I broadly agree’.

      And thanks!

      • Mike November 19, 2012 at 1:53 pm #

        Golem / Neil,

        If banks are nationalised, are they then subject to freedom of information requests?

        I think that would be very interesting. Especially in Ireland.

        • Golem XIV November 19, 2012 at 2:24 pm #

          That is, I am pretty sure why governments have tried not to naityonalize banks even if it means leaving only a tiny couple of percent in private hands.

  4. Neil Wilson November 16, 2012 at 3:55 pm #

    ” If you pump in billions one day for X you are a little restrained from pumping in another lot of billions for Y.”

    Not really when you’re just dealing with accounting entries on the monetary side.

    You can pump all day there because its not real. And most importantly it just won’t affect the real circuit. You are correcting the accounting so that a bank can be a bank again.

    The real circuit only gets perturbed when somebody borrows some money and spends it. And it is the real circuit where the actual restrictions lie. Money is just a convenient illusion.

    If your policy is to inject money via private bank borrowing, it really is very silly to have that channel crippled by accounting issues. Force them to recognise the losses and recapitalise. And if they can’t then put them into administration and resolve them via the nationalisation route.

  5. Ken Lorp November 16, 2012 at 4:04 pm #

    David,

    There is a another element to the government debt figures that you haven’t included and that’s all the unfunded liabilities that the government must meet. This includes PFI contracts, future pensions – both public sector and state pensions, future draws on NHS resources as a population bulge heads into their twilight years etc.

    In the past, governments kept costs off the books by promising candy in the future. Without very strong economic growth, the government cannot raise enough through taxation to fund these additional costs, so it will probably be debt funded and the market will not take too kindly to that.

    However, this is a common problem across most western markets and it’s a problem we’ve known about for many years. We are now having to deal with the consequences of politicians making promises like a drunken sailor. We are now dealing with the consequencs of inept regulators and we’re now dealing with the consequences of politicians not wanting to address major problems that we’ve known about for many years.

    The next decade will not be pretty!

    • Mike Hall November 16, 2012 at 10:24 pm #

      There is no government ‘funding’ problem for all those pensions PFIs etc. UK is issuer of it’s own fiat non-convertible currency. As such it can meet all & every liability, in its own currency, both now & in the future. It is a nonsense for such a currency issuer to ‘save’ money to finance some future liablity.

      The real issue is the extent of claims made by that money on the real resources, goods & services, able to be produced at the time. (I would suggest an appropriate tax policy in the future on those dubious claims, such that real resources are fairly distributed according to the democratic process & priorities pertaining at the (future) time.)

      This is all according to MMT’s (correct) understanding of the monetary system the UK already has, and the macro policy options that follow from it. These realities are also supported by numerous documents and statements by central banks (& bankers), globally, and also thers including BIS.

      If you are not familiar with MMT, doubtless this will appear counter-intuitive. There’s entirely understandable reasons for that. Not least decades of media and economics profession misinformation. The very last thing the thieves of banking want the public to understand is the monetary system & their free lunch in it. Please take time to study the source blogs, Professor Bill Mtchell’s is an excellent place to start.

      Golem,

      I believe Neil Wilson is right about the (lack of) inflation risk in what he suggests. To make the argument for inflation you have to show where banks’ recognising losses & following an insolvency process & recap actually puts new money (in big lumps) into the real economy. I don’t see it? (Obviously, regulation is needed to prevent lending for speculation on existing assets & the rest of the extractive casino.)

  6. Mike Hall November 17, 2012 at 1:32 am #

    This is a spectacularly good lecture last month by Yanis Varoufakis & Marshal Auerback at Columbia Law Society. (One of a series of guest lectures.)

    Absolutely thorough but well presented for a lay audience & very broad in scope. 2hrs but worth every minute.

    Modern Money & Public Purpose 3 : The Eurozone (crisis)

    http://www.youtube.com/watch?v=HpIsZL5FJVs&feature=player_embedded

    Probably the best overview I’ve seen so far.

    Great one-liner from Yanis:

    “It’s what happens when vested interest employs over-simplification to exploit prejudice”

  7. penny bloater November 18, 2012 at 10:23 pm #

    I was against QE but I can’t see how it will cause an increase in inflation.

    How is it any different to normal creation of fiat by private banks?

    Well, bank fiat through private credit creation enters into the real economy where at time to time the velocity of it’s manufacture massively out-strips productive capacity leading to a slump eg. 1974.1987.2008.

    QE on the other hand hasn’t even found it’s way into the real economy while M4 is shrinking at 5% PA. Clearly it’s just an accounting dodge to allow banks liquidity to buy UK gilts and bonds but none of the money markets have complained about this ‘sleight of hand’.

    Why – because the elites know full well that it is QE which is propping up their phoney over inflated asset prices at the same time. If the markets want to buy British debt they are free to do so – equivalent amounts of QE will then be ‘destroyed’ while UK gilts remain at record low yields. No inflationary effect as far as I can see.

    What does this tell us about the nature of money?

  8. sheepshagger November 19, 2012 at 8:43 pm #

    Economic/fiscal Terrorism.

  9. mariscos congelados November 29, 2012 at 5:36 pm #

    Remarkable things here. I’m very satisfied to peer your article. Thanks so much and I am having a look ahead to contact you. Will you please drop me a e-mail?

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